Shoppers at a supermarket in New York City on August 11, 2021.
Wang Ying | Xinhua News Agency | Getty Images
A looming question for the US economy is how long inflation is here to stay.
Based on recent government data, there are good reasons to ask.
The Consumer Price Index, which measures the average change over time in the prices paid by urban consumers, recorded a year-over-year gain of 5.4% in September, the fastest pace fast for decades.
Meanwhile, the Federal Reserve’s preferred measure of inflation, the basic personal consumption expenditure price index, hit a 30-year high in August, when it was up 3.6% compared to the previous year.
Fed officials are taking note, based on the recently released minutes of a September meeting, where some said it could go on longer than they had assumed.
They are not the only ones to worry. More than 7 in 10 investors at retirement age – 71% – said they believed rising inflation would negatively affect their retirement savings, according to a recent survey by Global Atlantic Financial Group.
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“The big argument right now is how much inflation are we going to get and how permanent it will be,” said James Angel, associate professor of finance at the McDonough School of Business at Georgetown University.
Signs of cost-pushing inflation, which are marked by increases in production costs, are appearing now, just as they did in the 1970s, Angel said.
On top of that, there have been monetary and fiscal stimulus packages piled up on the economy. That in itself is going to be inflationary, Angel said.
“We need to put on our seat belts,” Angel said. “Inflation is there. It’s real.”
Financial advisers who landed on this year’s CNBC Financial Advisor 100 list say inflation is a major issue in their work with clients. For many of these clients, it’s as much emotional as it is financial.
“Many of our clients came of age in the 1970s, the last time we saw significant inflation set in,” said Andy Pratt, partner and director of investment strategy at The Burney Company, who is n ° 38 on 2021. FA100 list.
The company, based in Reston, Va., Typically focuses on clients with $ 1 million to $ 2 million in investable assets.
Their customers remember soaring prices, long gas lines, and not being able to afford to pay, Pratt said. The benefits of high inflation, like higher wages, are not a priority, Pratt said.
To help manage their emotions, the firm reminded clients that this isn’t necessarily a repeat of inflation they remember, and it can happen for a variety of reasons.
He also offered strategic asset allocations to help them keep inflation under control, Pratt said.
Although this includes some exposure to bonds, the company is cautious about over-allocation to this asset class. At the same time, they looked at value stocks rather than growth stocks.
Meritage Portfolio Management, a boutique portfolio management company that is ranked # 60 on this year’s FA 100 list, also has clients, especially baby boomers, who regularly ask what soaring inflation means. .
Mark Eveans, president and chief investment officer of the Overland Park, Kansas-based company, said stagflation, characterized by high inflation and high unemployment, is one of his main concerns.
Notably, cost inflation, as mentioned by Angel, could be a trigger for stagflation. Other experts have also warned that stagflation is a key risk to watch out for.
The big risk for investors in such an environment is that it would be very difficult to achieve real growth rather than nominal growth, Eveans said. The ’60s to the early’ 80s were a prime example, he said.
“It wasn’t a good time for investors because they lost real money during this time,” Eveans said.
To deal with this risk, Méritage has taken the position that inflation is less transient than some experts had anticipated.
He also adjusts the strategies of his portfolios, which he generally constructs share by share and bond by bond. The company has increased its exposure to value stocks versus growth stocks over the past nine months, what Eveans calls a “shift at the margin”, rather than a drastic change.
Gas prices exceeded $ 4.00 per gallon at a San Francisco gas station on October 12, 2021.
Justin Sullivan | Getty Images
In addition, the company also increased its allocations in areas such as energy, materials and finance, and reduced client exposure to other sectors such as consumer staples.
On the fixed income side, Meritage is focused on income and capital security, said John Wallis, director of fixed income.
This includes a staggered approach to portfolio maturities, as well as a preference for corporate bonds over T-bills, he said. The company also adds inflation-protected treasury securities where it can.
Much of how the inflation story unfolds will depend on the Federal Reserve, Wallis said.
If the Fed falls behind, inflation could anchor itself in the financial system, forcing the central bank to take more aggressive action later, he said.
“This is probably what would concern me the most and probably surprise investors,” Wallis said.